An introduction to superfunds – a possible alternative to a full insurance company buy out for final salary pension schemes.

What is a Superfund?: A DB occupational pension scheme is established by a corporate body, which will be its sponsoring ‘employer’. When the assets and liabilities of a traditional DB scheme are transferred into a superfund, the link to that original scheme’s employer will be broken and the superfund’s trustees will, for security, rely upon a capital buffer provided by ceding employers and the superfund’s investors.

Who is it aimed at?: Schemes which are (or can be after an injection from their sponsor) fully funded on a low risk basis but cannot afford the costs of buying out the liabilities with an insurance company. Being less expensive than buy-out, superfunds are also expected to be somewhat less secure.

How are they funded?: Superfunds would have to demonstrate their financial adequacy. The DWP suggests that they show that there is 99+% probability of paying or securing members’ benefits in full, at all times. Exactly how they would do so is yet to be determined although it will involve stochastic modelling.

How to join?: The Government proposes to introduce a ‘principles-based gateway’ that would prevent transfers into superfunds from schemes that are able (or expected to be able) to buy out their liabilities in the ‘foreseeable future’—within five years. Otherwise, an existing scheme’s trustees will be required to notify the Regulator of their intention to transfer, and show how it is in members’ interests (including comparing the covenant before and after the transfer). The superfund’s trustees will also be obliged to reject a proposed transfer if it is not in the best interest of all of their members.

What is happening now?: DWP is currently seeking views on a proposed new legislative framework for the authorization and regulation of defined benefit (DB) ‘superfund’ consolidation schemes. Until then, DB scheme sponsors that are considering a superfund transfer are strongly encouraged to seek clearance and the Regulator has issued guidance.

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